How to Write Off Cryptocurrency Losses to Your Taxes
One of the big drawbacks of cryptocurrency is the dizzying price swings that can wipe out your investment, but there’s a gold lining to get the big hit: collecting tax losses. Due to a quirk in how the IRS classifies cryptocurrency, you can strategically sell your cryptocurrency at a loss, buy it back before the price recovers, and use the loss to offset capital gains taxes on other successful investments. Here’s a look at how it works.
Crypto is considered property as opposed to stocks or bonds.
Since the IRS classifies cryptocurrency as property, the rules for selling it are slightly different. One quirk is that the flush sale rules do not apply to cryptocurrency, which means you can sell and redeem cryptocurrency without having to wait 30 days as is the case with stocks.
This is where crypto investors have an edge – without the 30 day rule, they will have more flexibility to sell their cryptocurrency at a loss and then buy it again before the price rises again. The advantage of this is that you can use the reported loss from the sale of your cryptocurrency to offset capital gains taxes on other investments, which is known as tax loss collection . (Capital gains tax is levied every time you cash out an investment, and they can be quite high – up to 37% if you sell within a year). Buying cryptocurrency before the price rises means you can get the best of both worlds: you can write off losses and still realize the upside potential if the price rises sharply in the future.
For example, a $ 50,000 loss from a cryptocurrency will offset the $ 50,000 gain from the sale of shares, which means you don’t have to pay taxes on the gains realized. Another advantage is that the collection of tax losses can be carried forward to future tax years if it is not used in that tax year.
Of course there are risks
While collecting losses from cryptocurrencies, as described above, is considered legal for tax professionals, it operates in a somewhat gray area as the IRS has not issued a final ruling to exempt the sale of cryptocurrencies. As the IRS fights cryptocurrency in other ways , the rules for selling the wash could change in the near future. Make sure that the rules have not changed before doing any transactions to collect taxes.
Also, as CFP Jeffrey Levin explains to CNBC , selling crypto on the same day carries a certain amount of risk as the IRS can still classify them as “bogus” transactions with no “business case”, so it’s a good idea to separate buy and sell. even a little. “A day is more than enough,” Levin says. “I’ll feel comfortable defending this in front of the IRS.”
In addition, there is always a risk that you will not be able to redeem the cryptocurrency at the same price you bought it, even if it is only a day after you sold it. Crypto is volatile and experienced 10% fluctuations in one day. Finally, due to the complex nature of collecting tax losses, you need to keep good records of your transactions and seriously consider hiring a tax professional as they will be your best insurance against the IRS.
This article was edited after publication to clarify the sentence: “For example, a $ 50,000 loss from cryptocurrency will offset the $ 50,000 gain from the sale of shares, which means you don’t have to pay taxes on realized profits.”